Supervising Across Borders: The Case of Multinational Hierarchies

What is it about?

This paper examines how multinational corporations (MNCs) selectively assign supervisory responsibilities to units in countries with varying levels of institutional quality. Using data on the business activities and supervision relationships within U.S. multinational manufacturers in 1996–2008, I find that frontline subsidiaries in countries with weaker institutions (e.g., countries with insufficient protection of property rights and countries with limited information transparency) are more likely to be supervised by foreign rather than domestic supervisory units. Foreign supervision is even more likely when subsidiaries in weak-institution countries conduct activities that are more central to or interdependent with their parents’ global operations. These findings confirm that MNCs use differential supervision to enhance global coordination.

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Why is it important?

Arbitraging across institutional contexts is an important function of MNCs, but it also creates coordination challenges. The choice of organization structure, such as the differential assignment of supervisory responsibilities, is an important tool for managing these coordination challenges. The paper highlights one of the most unique features of MNCs: a multinational hierarchy that resides within firm’s boundary but across national borders. It also connects MNCs’ hierarchical structure with institutional imperfections that give rise to the emergence of the firm in the first place. In addition to the academic literature, the study also has implications for public policy and international business. One of the most significant features of MNCs is the extent to which they move resources across national borders (Dunning 2001). According to Kobrin (2001), because of these movements, MNCs are viewed as a compensating instrument for intrinsic cross-border market failures and are uniquely positioned to take advantage of the asymmetry between an increasingly integrated global economic system and a still segmented political system. The MNCs’ ability to operate worldwide systems against the limited reach of any national authority “creates asymmetries of both information and jurisdiction” (Kobrin 2001, p. 187). The increasing interdependencies among MNC activities around the globe weaken national governments’ control over their national economic actors and economic policy. MNCs have emerged as a source of private authority and gained increasing decision-making power vis-à-vis national states. This study sheds light on one important mechanism for MNCs to adapt their organization in response to national institutions: the allocation of supervision responsibilities across national borders.